Ten or 15 years ago, Suzanne and Gerald Ives -- a prosperous, professional Washington couple -- used to invest in stocks. But no more. Today nearly all their investment money is tied up in real estate.
Chuck Rich just made his first investment. The 27-year-old film critic and writer for WTOP-Radio bought government securities.
They are not alone.
Millions of Americans who 10 or 20 years ago would have purchased common stocks as their primary investments today instead are buying houses, condominiums, government securities, certificates of deposit, gold, or commodity futures.
Eight years of high inflation and high interest rates have driven stock prices down from their overvalued highs of the late 1960s and kept them relatively low. As a result, many individual Americans have found stocks an unattractive way of holding their wealth. Only Americans over 65 years of age are increasing their stock purchases.
Similarly pension funds, which were big buyers of stock in the late 1960s and early 1970s, are devoting ever-smaller portions of their incomes to equity purchases.
Just as individuals and institutions are finding stock purchases less desirable, companies have discovered that selling new stocks is a costly, unpalatable way to raise new funds. "We'd sure like to sell more stock. But as long as our stock is selling at 60 percent of book value (the worth of the companys assets), we can't justify it," said William Lowe, vice president for finance at Inland Steel Co. in Chicago.
Instead Inland raises the long-term funds it needs by going into debt or keeping profits rather than-paying them out as dividends to shareholders.
Other big companies are doing what Inland is doing. Rather than selling new shares of their stock -- which represent a part ownership in the company -- they are selling bonds, paying out a smaller percentage of their profits to shareowners or hitting the banks for long-term loans.
Unlike a common stock, where dividend payouts are dependent upon the performance of the company, bonds are long-term debt securities that guarantee the owner a fixed payment every year.
Since 1970, the amount of corporate bonds outstanding has increased by more than $230 billion, while new stock issues have totalled less than $80 billion.
Over the same period, companies have reduced their dividend payout rates from about 60 percent of after-tax earnings to 40 percent, according to Johann Gouws, a general partner of the investment banking firm Salomon Brothers.
Banks used to make mostly short-term loans to businesses to finance inventories and the like until revenues were realized. Today a significant portion of our loan portfolio is in long-term loans with seven-year or eight-year time horizons, according to George R. Baker, who heads general banking services for Continental Illinois National Bank.
In 1971, when stock prices were high, companies raised more than 20 percent of their long-term funds by selling new stock to the public. Last year new stock sales accounted for about 4 percent of the net new funds raised by American corporations. A new Conference Board study reports that many major corporations are planning to increase their use of bonds in the next 12 months to come up with outside funds they need for investment purposes.
If it wasn't for utilities, the amount of new stock sold by Americans companies would be even smaller, according to Jeffrey Schaefer, director of research for the Securities Industry Association.
Much of the new stock sold by utilities is sold by the giant American Telephone and Telegraph Corp., which will raise about $1 billion this year through a dividend reinvestmen plan. About a quarter of AT&T's 3 million shareholders automatically buy new company stock with their dividend payments.
In 1969 the outstanding value of corporate stock was equivalent to 110 percent of the total gross national product, according to Charles Boothe of the Bank of New York. Last year it was down to 45 percent.
New stock sales never had been the primary means by which big companies have generated new capital. But in recent years those sales almost have become an unimportant source of funds to most large companies.
Small companies that might be the International Business Machines of the future, however, often have no alternative but to sell stock if they are to expand. Their profits aren't big enough to provide much in the way of retained earnings, banks aren't willing to take the risk and they can't sell bonds. So these companies have to sell a part of themselves to the public. But in this depressed market they cannot, according to one major investment banker.
In 1969, there were 698 companies with a net worth of less than $5 million each able to sell shares to the public, raising $1.4 billion in the process. Last year only 21 such companies were able to sell stock, and they generated but $129 million in capital.
The stock markets -- be they formal trading floors such as the New York Stock Exchange or the loosely knit group of dealers called the over-the-counter market -- exist in part to facilitate the raising of new capital.
"As a capital-raising mechanism, it just hasn't been working all that well the last few years," said Leslie J. Silverstone, head of Dean Witter Reynolds' Washington office.
The increasing reliance of American companies on debt capital rather than equity capital could become a cause for concern if it continues. "You need an equity base to support debt," said Robert Salomon Jr., general partner of Salomon Brothers. When a company hits a slow period, it can reduce or eliminate its dividends (one of the reasons stocks are more risky), but it must continue to pay interest on bonds or bank debt.
"At some point, the system buckles under the debt," Salmon maintained.
For example, Chrysler Corp. has eliminated the dividends it pays, but still must shell out a hefty amount of income to pay its bankers and its bondholders.
Unless stock prices rise, however, the stock market is unlikely to become a vehicle for new sales of equity by companies. Instead the stock market will remain a financial horse race where individuals or institutions can place bets on the relative performance of an individual stock, but their activity will do little to entice companies to raise new capital.
Indeed stock investors seem to be running faster to nowhere.
Although nearly 6 million fewer individuals own stock today than in 1970 and institutions are putting less and less of their income into stocks, trading volume is rising.
In 1970 an average of 11.6 million shares of stock changed hands each day on the New York exchange. Last year trading volume averaged 28.6 million shares a day. In the same period, the Dow Jones industrial average has sunk about 20 percent -- at a time when inflation has pushed up prices more than 60 percent.
Is it any wonder that households keep only 12.3 percent of their assets in stocks today compared with 22.7 percent in 1970 and 28.3 percent in 1968?
"You've just got to write off the stock market," argues the manager of a small investment fund.
Not everyone agrees.
Donald Regan, chairman of Merrill Lynch and Co., the nation's largest financial services company, said the nation's equity markets are poised for a substantial recovery. When that happen, companies will find it economical again to sell stocks to raise capital.
"I see in American corporations the greatest undervalued set of assets in existence in the world," Regan said. "Everything else relative to the asset value of American corporations is overvalued: painting, gold, diamonds, land, timber, etc."
That fact has not gone unnoticed by the companies themselves.
"Companies are finding it cheaper to buy one another than to invest in new facilities themselves," said Boothe of the Bank of New York. If a company is selling for only 60 percent of book value, another company can purchase its stocks at a substantial premium over current trading prices and still come away with a bargain.
"Why buy a new 747 for $25 million if you can buy an airline and get its fleet for the equivalent of $20 million a plane?" asked one banker.
Similarly some companies are buying back their own shares. "Not only does it boost our prices and earnings per share by reducing the number of shares outstanding, it also reduces the amount of dividends we have to pay out," said the chief financial officer of a company that is buying its own shares.
Some companies even have liquidated themselves: sold off their assets and distributed the proceeds to shareholders.
What has happened? Ten years ago, common stocks were the darling of both individual investors and institutional investors. In 1952 only one American in 16 owned stock. In 1970 it was one in four.
Analysts cite a combination of stocks being over-priced in the late 1960s, the heavy round of inflation and high interest rates that have shadowed the economy since 1970, and tax laws that discourage investors from buying stocks and companies from trying to sell them.
"When you add everything up, it's no mystery why the stock market is performing so poorly," said James Balog, senior vice president of Drexel Burnham Lambert Inc. Analysts list a host of factors that have hurt the equity markets, among them:
Tax laws that encourage investment in houses -- where mortgage interest is deductible -- and in tangible assets such as stamps coins, paintings and the like. "Mortgages are now the largest component of the capital markets," noted Robert Salomon.
The same tax laws that allow companies to deduct interest payments as a cost of doing business but permit them to pay dividends only out of after-tax profits. Furthermore the dividends are taxed again when received by shareholders.
The discouraging impact on investors of the increasing retention of profits by corporations. Unable to sell new stock, companies devote a smaller share of profits to dividends. Because investors have not realized much increase in the price of their stocks, they cannot be comforted by rising dividend payouts. In the last 10 years, dividends have about doubled, while retained earnings nearly have tripled. "It's a self fulfilling prophecy of discouraging people from buying stocks," say Salomon.
High interest rates, which make investing in nearly riskless assets such as Treasury bills and very safe assets such as corporate bonds or high-yielding bank certificates nearly as profitable -- and in some periods more profitable -- than buying stocks.
Inflation that eats away at the value of corporate earnings and makes the replacement cost of current corporate assets (which the tax laws value at original cost) rise sharply every year.
The growth of pension funds and Social Security which discourages individuals from saving at all.
But probably the most important reason investors -- first individuals, then institutions -- became wary of stocks was the sharp decline in stock prices that began to occur around 1970.
Investors were lured to the market by the sharp growth in stock prices that began in the 1950s and 1960s and was accompanied by strong economic growth and low inflation.
Common stocks began to seem riskless. And Most American investors, be they individuals or institutions, are averse to risk.
"It's the simple rule of supply and demand," said Drexel Burnham's Balog. "There was a tremendous influx of cash into the equities markets in the late 1960s. The whole pricing mechanism got out of whack. Stocks were severely overpriced."
As happends with most overpriced items, the stock bubble burst.
"Lo and behold, just when inflation became rampant, stock prices were killing you," Balog said.
Individuals began to get out of stocks. Institutions were slower to do so -- today nearly one-third of the stock outstanding on the New York exchange is owned by institutions and 30 percent of the trades are with institutions -- but they slowly are moving into other investments as well.
Real estate became the next game. Americans always have preferred to live in their own homes. And just about the time the stock market began to sag, the early members of the postwar baby boom began to search for houses.
Housing prices began to climb, and homeowners, aided by government agencies, found that for small down payments they could buy houses, save on their taxes and watch the value of their real estate climb.
According to Federal Reserve Board figures, households had 17.7 percent of their assets in houses worth $569.7 billion in 1970. Their stock holdings were larger: $729 billion.
Today household own residential real estate worth $1.5 trillion -- 22.8 percent of total assets -- while their stocks are worth only $790 billion.
They also are showing interest in other things such as gold, and in newly formed investment devices such as stock option and financial futures that permit investors to put up small amounts of cash with the hope of large financial gains.
But the nation's love affair with tangible assets will come to an end just as its love affair with the stock market did a decade ago, many analysts believe.
"It's fine to own a home that keeps increasing in value," said Washington broker Julia Walsh. "But what good is that if you cannont sell it. And we're beginning to see signs of that in Washington right now.
"The young people who have never invested in stocks will begin to realize that they might not be able to sell a stock for quite what they want, but they will always be able to sell it. That's the great virtue of the stock market. It brings together thousands of buyers and sellers," Walsh said.
Indeed liquidity is one of the primary functions of the stock market, according to New York Stock Exchange chief economist William Freund. It is a forum where investors always can exchange their financial assets for cash.
"All we need to change attitudes toward stocks is for enough people to realize that owning things is not alway what it is cracked up to be," Souws of Salomon Brothers said. "For example, antique car sales in a West Coast auction last spring fetched prices far beyond what was anticipated. A 1935 Mercedes which was expected to sell for $200,000 went for $400,000. When a similar auction was held here last month, people had high expectations. But only about eight of the 40 cars were sold."
"In our business, people are highly skilled at looking in the rear-view mirror. They haven't noticed that somehow the Standard & Poor's index (of 500 stocks) has sneaked in with a 16 percent return recently," Gouws said.
Drexel Burham's Balog is not so sure that stocks will rebound. "Unless there is a cut in interest rates or an increase in the reward for investment, Americans are not likely to return to the equities markets," he said. "When inflation is as high as it is, are stocks really a bargain?"
Merrill Lynch's Regan noted that there will be a big tax debate in Washington in the coming years that will determine whether the laws will continue to penalize savings and investment.
"Half the interest in buying things like paintings and stamp collections is a desire to save in a way that the government won't get you," said Salomon Brothers' Salomon. "If you buy a stock, or put your money in a savings account, they want your Social Security number."
Analysts point our that prices have soared in France, where last year investors were given a tax break for buying French stocks.
Analysts here point out that the reduction in the capital gains tax passed by Congress last year seems to have had some impact on stocks here.
Schaefer, of the Securities Industry Association, pointed out that there was a surge in public stock offerings by small companies in late 1978 and early 1979. During the first half of 1978, only one small company sold stock to the public. In the last half of that year, 20 did. During the first half of 1979, another 16 companies made public offerings. CAPTION: Chart 1, Corporate Sources Of Long-Term Funds by Glenn Mosser for The Washington Post; Picture, no caption; Chart 2, Equity Capital Raised By Companies With Net Worth Of Less Than $5 Million